Bumps in the Road

That popped into our mind as we read headlines last week of Ford seeking a partnership with Toyota to learn the famed Toyota Production System – just as GM sought 20 years ago when it set up the NUMMI auto plant joint venture with Toyota in Freemont, Calif.

Back in the 80s, the Japanese lean production machine (as epitomized by Toyota) was considered unbeatable, and the conventional wisdom was that it was only a matter of time before it sucked away the last vestiges of manufacturing from the western world.

Today, the conventional wisdom is that you can’t underprice Chinese manufacturers or match the productivity of India’s programmers, and that it’s certain that they too will become impossible to compete against. Over the past couple years, Tom Friedman’s book, The World is Flat, has become the newest business bible based on its premise that an interconnected world inevitably levels playing fields.

There’s little question that the Japanese lean production machine sparked a remarkable transfer of wealth to Japan in 1980s, and that China and India are effectively shifting the center of gravity in manufacturing, software, and back office processing. And there’s little question that the flat world is enabling emerging regions to join the world economy.

But there are invariably bumps on the road to inevitability.

Back in the 80s, we recalled articles posing the half-seriousl question on what Japan Inc would do after it bought California. Heck, it already snapped up Rockefeller Center. And inside executive suites, bootlegged translations of The Japan That Can Say No were must-reads.

Problem was, Japan’s success was built, not only on the dominance of its lean production machine. It was also built on a system of highly rigged trading rules demanding unfettered access to export markets, but severely restricting imports or the ability of offshore companies to set up shop in Japan.

Nobody realized what havoc that would eventually wreak. The huge entrapment of wealth brought by Japan’s unbalanced export machine begat a real estate bubble that practically bankrupted the nation’s financial system. Meanwhile, the arrogance of market leadership spawned delusions that Japan could extend dominance to the computing industry as well. Japan’s Fifth Generation Computing Project aimed to reinvent software through artificial intelligence. It foundered because Japanese culture lacked the necessary individualism and creativity.

Similar cultural issues, institutional hurdles, and overconfidence will trip up any aspiring economy fixated by the dream of inevitability.

India has competed on a huge, educated, and highly motivated workforce, backed by training in newer practices, while China has traded on basement wages, an absence or regulation, and the ability to ramrod infrastructure.

But the downside is that India has a highly bureaucratic culture that has infected some, although not all companies. Meanwhile, China lacks the rule of law and stifles civil liberties, placing at risk the kind of creativity necessary to allow it to advance higher up the value chain. And it’s kept its currency at unrealistically low exchange rates (sound familiar?).

In a recent panel, Tom Friedman recalled a comment from his grandmother, that any country that censors Google would only get so far.

Of course, it could be argued that obstacles and adversity can spur excellence, witness Russia’s technological and political backwardness that forced programmers to be more clever as they worked with primitive equipment. But keep in mind, they’re from a country that practically owns the game of chess.

As for the inevitability that the rise of offshore regions is a zero sum game, in actuality, it has changed the nature of manufacturing, back office processing, and software development. Rather than a sucking sound, the flat world stretches the value chain as design, customization, configuration, and final assembly are performed closer and closer to the customer. And once more, you’re hearing about a shortage of qualified software engineers, not just in India, but the developed world as well.

Unlike conventional wisdom, our manufacturing and software sectors are hardly dead in the water. What was supposed to be inevitable wasn’t.

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One thought on “Bumps in the Road”

Tony,
Another perceptive, thought-provoking article.
First, a couple of points to validate your thesis:
1. Western firms are already beginning to respond to Indian firms–trends about which Ovum Summit (the new incarnation of Summit Strategies) have (of course) written extensively. First by focusing much more extensively on selling business-based value propositions to LoB executives, and wrapping IT-based value propositions within the context of broader business solutions. Second by \\\”productizing\\\” traditionally service-based deliverables into software. The most exiting and promising iteration of this is the instantiation of business processes into SOA-based business services.
2. \\\”India prices\\\” and \\\”China prices\\\” are already becoming irrelevant as costs in the relatively few cities that currently provide world-class services and manufacturing capabilities, are rising and as other countries (Vietnam, Phillipines, Costa Rica and–in the very earliest stages–some African countries) are already beginning to beat these prices.

The glitch in all of this, the remedy that you cite — the stretching of the flat world value chain — may well be threatened by the raising of the ugly head of protectionism. If Western (e.g., U.S.) companies can respond rapidly enough to stem voter and Congressional reaction, all will probably work out as you suggest. If not, adjustment to these changes may be considerably less fluid than you suggest.